Learn About the Differences between Secured and Unsecured Loans
- Two Wheeler Loan
- Hero FinCorp Team
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Businesses often have to take loans to meet their various expenses. When you are looking to borrow money for your business, you need to figure out whether to opt for a secured loan or an unsecured loan. The former has easier eligibility criteria, lower interest rates, and high borrowing limits. However, the lender can repossess your property in case of a default. On the other hand, you do not need to provide any collateral to obtain an unsecured loan. Read on to know the difference between secured and unsecured loans.
What is a secured business loan?
A secured business loan is a financial instrument through which you can borrow a certain amount of money. And against the amount you borrow, you need to provide security to the lender, usually in the form of an asset. Most lenders in India offer secured business loans to small and medium businesses. It helps them in securing their investment and also encourages the borrower to repay the loan on time.
What is an unsecured business loan?
When you opt for an unsecured business loan, you can borrow a certain amount of money without having to pledge any asset as collateral. Usually, unsecured business loans offer lower loan amounts as compared to secured loans as lenders have limited ways of covering their losses in case of a default.
Also Read: Know About the Application Process of Unsecured Business Loan
Secured vs unsecured business loans: The difference
Now that you know the meaning of both secured and unsecured business loans, let us learn about some of their key differences to comprehend which is better—unsecured loan or secured loan. To begin with, let us first understand the different types of secured loans and unsecured loans.
Different types of secured loans:
The meaning of secured loans is derived from the fact that they are backed by your property or valuable assets. Some of the most common secured loans are as follows.
Under this type of secured loan, to obtain funds, the borrower must pledge his or her residential or commercial land or building as collateral. As the property involved in LAP bears a higher value, the loan amount is higher, and the interest rates are lower.
Different types of unsecured loans:
Such types of loans are offered based on the borrower's profile. Some of the common unsecured loan products are:
An unsecured loan or a secured loan? Which is better?
Collateral requirement
Collateral can be defined as a high-value asset that acts as security for the loan you have applied for. If you want a secured business loan, then you have to offer an asset such as land, property or equipment as security to the lender. On the other hand, if you have opted for an unsecured loan, you will not be required to put forward any collateral. The major advantage of an unsecured loan is that you can easily get a loan based on your good credit history and a stable income even without collateral.
Also Read: Is An Unsecured Loan The Right Option to Fund The Growth of Your Business
Rate of interest
One of the advantages of a secured loan is that most secured business loans come with significantly low rates of interest. It is because the lender has security in place to recover their losses in case of a default.
On the other hand, most unsecured business loans have moderately higher rates of interest. Here, the interest rate is dependent on the loan amount, business credit history, existing debt obligations, and such factors. The higher the risk for the lender, the higher will be the interest rate. Therefore, when it comes to secured loan vs. unsecured loan interest rates, the former has the advantage.
Amount of loan
If you need a higher loan amount, then it is better to apply for a secured business loan. It is because most unsecured business loans in India offer comparatively lesser loan amounts. You may also opt for a loan against property for business.
Disbursal of the loan amount
The speed of loan disbursement varies depending on the lender you choose. But generally, secured loans take longer to process as there is a lot of due diligence that needs to be done by the lender. On the other hand, most unsecured loans have a fast loan disbursal process. So, if you are wondering, is an unsecured loan better than a secured loan. The answer is yes, it is if you are in immediate need of funds.
Repayment tenure
If you want a loan that comes with a long tenure of repayment, then applying for a secured loan is a better option. They generally have 15-30 years of repayment time. An unsecured business loan, meanwhile, only allows up to 5 years of repayment time.
Impact in case of default
No matter the type of loan you avail of, in the event of default, there will be an impact on your credit history. However, the intensity of impact may differ from one loan to another.
In the case of a secured business loan, the impact of default is significantly lower as compared to that of an unsecured business loan. The reason can be credited to the impact of the loss that the lender has to bear.
This is the only case where you would lose something in both circumstances. There is no advantage of secured and unsecured loans with respect to repayment default.
Watch video: Secured or unsecured loan? Here’s a guide.
Conclusion
Both secured and unsecured loans have their advantages and disadvantages. You can opt for either one of them depending on your situation and requirement. However, it is important to do due diligence before opting for a source of credit as the right business loan can propel your business to new heights.
Disclaimer: This post was first published on 24 November 2020 and has been updated for the latest information, freshness and accuracy.
What is a secured business loan?
A secured business loan is a financial instrument through which you can borrow a certain amount of money. And against the amount you borrow, you need to provide security to the lender, usually in the form of an asset. Most lenders in India offer secured business loans to small and medium businesses. It helps them in securing their investment and also encourages the borrower to repay the loan on time.
What is an unsecured business loan?
When you opt for an unsecured business loan, you can borrow a certain amount of money without having to pledge any asset as collateral. Usually, unsecured business loans offer lower loan amounts as compared to secured loans as lenders have limited ways of covering their losses in case of a default.
Also Read: Know About the Application Process of Unsecured Business Loan
Secured vs unsecured business loans: The difference
Now that you know the meaning of both secured and unsecured business loans, let us learn about some of their key differences to comprehend which is better—unsecured loan or secured loan. To begin with, let us first understand the different types of secured loans and unsecured loans.
Different types of secured loans:
The meaning of secured loans is derived from the fact that they are backed by your property or valuable assets. Some of the most common secured loans are as follows.
Under this type of secured loan, to obtain funds, the borrower must pledge his or her residential or commercial land or building as collateral. As the property involved in LAP bears a higher value, the loan amount is higher, and the interest rates are lower.
- Vehicle loans:
- Secured business loans:
Different types of unsecured loans:
Such types of loans are offered based on the borrower's profile. Some of the common unsecured loan products are:
- Unsecured personal loans:
- Small business loans:
- A business line of credit:
- Business credit cards:
An unsecured loan or a secured loan? Which is better?
Collateral requirement
Collateral can be defined as a high-value asset that acts as security for the loan you have applied for. If you want a secured business loan, then you have to offer an asset such as land, property or equipment as security to the lender. On the other hand, if you have opted for an unsecured loan, you will not be required to put forward any collateral. The major advantage of an unsecured loan is that you can easily get a loan based on your good credit history and a stable income even without collateral.
Also Read: Is An Unsecured Loan The Right Option to Fund The Growth of Your Business
Rate of interest
One of the advantages of a secured loan is that most secured business loans come with significantly low rates of interest. It is because the lender has security in place to recover their losses in case of a default.
On the other hand, most unsecured business loans have moderately higher rates of interest. Here, the interest rate is dependent on the loan amount, business credit history, existing debt obligations, and such factors. The higher the risk for the lender, the higher will be the interest rate. Therefore, when it comes to secured loan vs. unsecured loan interest rates, the former has the advantage.
Amount of loan
If you need a higher loan amount, then it is better to apply for a secured business loan. It is because most unsecured business loans in India offer comparatively lesser loan amounts. You may also opt for a loan against property for business.
Disbursal of the loan amount
The speed of loan disbursement varies depending on the lender you choose. But generally, secured loans take longer to process as there is a lot of due diligence that needs to be done by the lender. On the other hand, most unsecured loans have a fast loan disbursal process. So, if you are wondering, is an unsecured loan better than a secured loan. The answer is yes, it is if you are in immediate need of funds.
Repayment tenure
If you want a loan that comes with a long tenure of repayment, then applying for a secured loan is a better option. They generally have 15-30 years of repayment time. An unsecured business loan, meanwhile, only allows up to 5 years of repayment time.
Impact in case of default
No matter the type of loan you avail of, in the event of default, there will be an impact on your credit history. However, the intensity of impact may differ from one loan to another.
In the case of a secured business loan, the impact of default is significantly lower as compared to that of an unsecured business loan. The reason can be credited to the impact of the loss that the lender has to bear.
This is the only case where you would lose something in both circumstances. There is no advantage of secured and unsecured loans with respect to repayment default.
Watch video: Secured or unsecured loan? Here’s a guide.
Conclusion
Both secured and unsecured loans have their advantages and disadvantages. You can opt for either one of them depending on your situation and requirement. However, it is important to do due diligence before opting for a source of credit as the right business loan can propel your business to new heights.
Disclaimer: This post was first published on 24 November 2020 and has been updated for the latest information, freshness and accuracy.